Goldman Sachs (GS), which quickly turned back into a profitable institution after taking bailout money from the government, now wants to reduce its taxes on that profit by buying tax credits from Fannie Mae. Fannie Mae earned those tax credits by encouraging low-income housing, but can't take advantage of them because it's not making any profits.

Enter Goldman Sachs, which has swooped in to offer cash in exchange for the tax credits, according to a report in The Wall Street Journal, which was unable to find out what Goldman plans to pay for them. Obviously, for Goldman to make money on the deal, it must buy the tax credits for less than they will be worth to it in tax savings. How much less is the big question.
The Treasury Department is considering the deal, which according to reports could be as high as $1 billion in credits, but, of course, Goldman won't pay that much. It will negotiate a deal to buy the credits at a discount.

Fannie Mae could certainly use the infusion of cash. So far, since the government took over Fannie Mae and Freddie Mac in September 2008, Treasury has invested a combined $96 billion in them, and that none of that money may ever get paid back. Fannie Mae lost $37.9 billion in the first six months of 2009.

The tax credits under consideration derive from an incentive in the law for investors who finance qualified housing developments. They tend to be used over long periods, such as 10 years, and are attractive to companies that want to use them to write off future profits. During the real estate boom, both Fannie and Freddie loaded up on these credits, but now that they are facing yearly loses, the credits can't be used.

If the Treasury Department allows the deal, it could reduce the amount of money Fannie Mae has to borrow from the government. That could be good news for taxpayers, but only if Goldman Sachs won't be able to write off more in taxes than it pays in cash for the tax credits. If the deal is a wash for the taxpayers, it could make sense. But if Goldman Sachs is able to pay significantly less for the tax credits than it gains in benefits, there could be a major uproar from Congress and the public.

The Treasury Department must structure the deal in such a way that it won't cost the American taxpayers money, and even better, reduce some of their burden in propping up Fannie Mae. Right now, no one knows how this will play out, because no figures for the deal are publicly available. But taxpayers will not stand for any deal that allows Goldman Sachs to make a profit at their expense.

Lita Epstein has written 25 books, including Reading Financial Reports for Dummies and Trading for Dummies.